How to Manage Expenses Better During the Next Downturn

The current economic crisis has created a new sense of urgency for business owners to manage expenses. Many businesses are having trouble keeping up with the demand in this time of high uncertainty. Sales may be down, but overhead is still there and increasing as companies try to tighten their belts even more. It’s an important time for you as a small business owner to take good care of your finances so you do not find yourself struggling before things start to improve again.
Here are six tips that will put you on the right path.

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#1 Get Crystal Clear on your Expenses

When expenses are not managed properly, your company is left vulnerable during times of economic uncertainty. The most important thing you can do is know exactly what it costs to run your business on a regular day as well as during times of crisis.

To do this, put together a real-time list of actual expenses incurred by the company over a defined period, say a week or two. It usually helps to categorize your business expenses (marketing, bank fees, insurance, etc.). You may be surprised by what you learn: recurring expenses that are not budgeted for can hugely affect your business’ performance during uncertain times.

If you don’t already have one, it’s worth signing up for a good business credit card that will make it much easier to track these expenses, and also save you money along the way. Here are a few cards to look at if you're not sure where to start.

#2 Apply the 80/20 Rule to Create an Expense Management Plan

The 80/20 Rule states that 80% of your expenses generate just 20% of your revenue, so if you can isolate those cost centers, you can make your business much more profitable. Conversely, 20% of your expenses generate 80% of your revenue, so if you hold onto those while eliminating some of the former, you’ll be running a well-oiled machine.

For example, you may need to rent office space or telephones for your business to run properly. While these are essential expenses, they are not necessarily the most cost-effective way to use your resources during bad economic times. There are other options such as:

  • Taking over a co-working facility with other entrepreneurs from around the state or country
  • Moving to a home office or renting an office that is more affordable
  • Going remote and using a virtual mailbox for any physical mail
  • Getting a virtual telephone service

Applying the 80/20 rule lets you focus your efforts on making serious cuts to your major expenses (the 80%), not just minor cuts across the board that will actually end up hurting your business more.

#3 Approach Hiring with a Potential Future Downturn in Mind

Now is a great time to look at your staffing plan. You may need to be more conservative in adding new employees: keep turnover rates higher, so you are not stuck with the cost of hiring and training new employees if business really slows down, especially if these workers are hourly or commission-based.

It’s important during uncertain times to have “conservative employee plans" so that, in case revenues drop even further, there will still be enough work for everyone on staff without having to lay anyone off. Be sure your current employees know about your situation so they won't become discouraged. And do not forget about the possibility of shortening pay periods temporarily.

#4 Negotiate with your Suppliers

You should negotiate with your suppliers and try to lock in prices for key services or products. Get your suppliers to agree to longer-term contracts on key items so that you are not vulnerable when the economy or your business goes into a downturn.

When negotiating with suppliers, the best approach is to clearly explain your business needs and lay out a long-term strategy so that you can both work toward the same goal. It's also important to look at how the supplier will be most affected if business slows down and see if there are ways to minimize these negative effects. Empathy is key.

Finally, keep in mind whether or not your company has high negotiating leverage over its suppliers. This can change dramatically depending on how much of a critical resource (input) each party needs from the other. If possible, try to shift this leverage in your favor during good economic times so you'll have more wiggle room during downturns.

It's important to note that you may have more leverage with a supplier that depends on your business as a high-volume customer versus one that can easily give you up if you are not taking their product or service.

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#5 Think About Pricing Between now and the Next Downturn

Now is a good time to think about raising prices. It doesn't have to be drastic—just a test run at 10% or 15% for a few months.  If it goes well, try bumping up your prices again by small increments of 2% or 3%. In this way, when the next downturn comes, you should be in a better position to handle it, as you'll enjoy the following benefits:

  • You'll have a lot more room to negotiate with your customers.
  • If you raise prices slowly over time, you won't have to increase during a downturn, and your customers will still buy from you and won't resent the increases as much.
  • Your company may not be as affected by the drop in demand because you've already increased prices to account for that.

Additionally, your company will also have more cash on hand during difficult times, so you'll have a bit more breathing room.

#6 Sell These Items if you need to Liquidate Cash Quickly

If you don’t have much time to think, just be aware of the following items that you can sell quickly. You can always come back and choose one if it's your last resort. The idea is that these are things that you do not need but still have a market value (meaning other people want them). Of course, all businesses are different, and I'm sure some would benefit more from others on this list.

These items may or may not fit into your business model:

  • A company car
  • A vacation property
  • Equipment/tools
  • A rental property with tenants already in place
  • Other undervalued assets

There are several options for you when looking to sell these types of assets:

  • Private party sales/auctions
  • Online auction sites (eBay, Amazon, etc.)
  • Online car sales sites like eBay Motors, CarGurus and TrueCar

Keep in mind that traditional brokerages can usually get you more money for your assets, though you must be willing to wait a longer time.

The Bottom Line

These tips should help you to stay afloat during the next downturn.  Hopefully, this post will help small business owners navigate the difficult times ahead by managing expenses better. Remember, the six key takeaways are:

  • Get crystal clear on your expenses.
  • Create an expense management plan.
  • Take a conservative approach to hiring.
  • Negotiate with your suppliers to stem your burn rate.
  • Slowly raise prices during good times.
  • Sell unessential items to access cash quickly when you need it.

While no one wants for things to get worse than they are now, it’s always good to hope for the best but prepare for the worst.

About the Author

Jordan Bishop is the founder of Yore Oyster and How I Travel, two sites to help you optimize your finances while living an international life. He recently published his first book, Unperfect, an exploration of problem solving.

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